Trying times for Kiwi &#39super&#39 pension

It does not seem too difficult to be further to the left than Tony Blair&#39s Government but in pension reform New Labour has reflected a trend being followed by most Western socialist economies.

Blair came to power promising pension reform and the country got it, for good or bad, in the form of stakeholder. Stakeholder essentially shifts much of the burden of retirement provision from the state to individuals and, despite differences in delivery, this mirrors the approach that most other countries are taking.

The argument is well worn – an aging baby-boom population means a burgeoning pension bill that can either be paid for with massive tax hikes or greater individual provision. Not surprisingly, governments are finding it easier to encourage greater saving as the political consequences of big tax rises tend to be fatal.

But on the other side of the world, the Labour government in New Zealand is looking at a very different approach.

While the social democracies of Europe rush as fast as possible away from state provision of welfare, the Kiwis are looking at establishing a NZ$60bn superannuation fund over the next 20 to 30 years.

The mindset in Europe, and particularly the UK, has become so entrenched that a government considering setting up a new state-run super scheme seems ludicrous.

But the super plan is being pushed hard by New Zealand finance minister Dr Michael Cullen and is due to be established in 12 months&#39 time. The details are being ironed out with Labour&#39s coalition partners and will go before cabinet in the next two or three weeks.

Dr Cullen&#39s New Zealand superannuation fund will be built up from surpluses in government expenditure and will not see any drawdown for at least 20 years – which will make it the main source of retirement income for the retiring baby boomers.

New Zealand currently pays for its pensions on a cash-in, cash-out basis. Direct taxation covers the lot and represents about 4 per cent of GDP. But with an aging population, forecasts show that pension costs will rise to 9 per cent of GDP within 50 years and, to pay for it, tax would have to rise by 15 cents in the dollar.

To avoid this, Cullen wants the billion here and there that is left over after the annual expenditure round rolled into the fund and left to grow under management by commercial operations.

According to Cullen&#39s calculations, by 2020, there would be sufficient funds, although the exact amount is still not known, to pay the 65 per cent of average wage that determines the NZ pension. The pension would be universal.

The fund will see about a $4bn injection in the first three years and after that the government would be committed to paying into the fund, although it would be offered latitude to take account of lean years.

But the super fund idea has left economists staggered and opposition MPs baffled,particularly as most of the rest of the world has ditched such ideas in favour of private pension provision.

The arguments against seem to be, first, that government surpluses are never what they seem. In 1994 a $7.6bnNew Zealand government surplus was forecast but it ended up as $1.5bn.

Second, any surplus that is generated currently goes to paying off New Zealand&#39s $23bn national debt and economists argue Cullen has chosen an expensive way to save for the future.

Economist David Grimmond estimates the interest the government pays on its debt – about $2.5bn a year – will be greater than the investment income from the super fund by about 1.5 per cent – equivalent to $11.7bn over 20 years.

And third, there is no guarantee that any subsequent right-wing governments will not ditch the scheme and wander off with their own plans.

“In New Zealand we have such abad track record on policies for superannuation,” says Bill English, the opposition National Party&#39s finance spokes- man and Cullen&#39s opposite number. “Both major parties have held most positions possible on this issue over the last 20 years and we have still not come up with anything because this plan is vague andit has no guarantees.

“Does it provide certainty? No. It will not give security to a 35-year-old looking at retirement provision because we do not know how much is going to be in the fund because it all comes from surpluses. Some years there will be a small amount and others nothing.

“People are going to have no idea how much the government will have to give them in retirement income and that seems to me a pretty fundamental problem. People need to be sure.

“New Zealand Labour is heading down this track because they are different to European socialist governments. Here, they are more left-wing and they have real problems with a private way of doing things. That is a fundamental flaw in their policies, they cannot even consider it.”

National has not shown its hand over the proposals for dealing with the baby boomers but Rodney Hide, finance spokesman for National&#39s opposition partner ACT, has no doubt about what is needed.

“The problem for people in the workforce now is we are taxing them too much so they cannot save for retirement. If we reduce taxed income and encouraged saving, we could deal with this problem more effectively than Dr Cullen&#39s grand plan,” he says.

But Cullen believes his super fund proposal would be more efficient and would cost less than repaying debt or encouraging private provision.

“The Brits are different. There is a long tradition in Europe, and particularly the UK, of income-related benefits in retirement,” he says.

“In New Zealand, there is a strong belief that it is more efficient and sensible for the government to concentrate on its role in providing a floor and then look at the arrangements whereby people voluntarily save. The flaw in the European scheme is that ours is more efficient and it is cheap.

“With debt repayments, you also have to consider what happens after you have paid off all the debt you would still be in a situation of having to pay for the demographic gap.”

But while Cullen tries to smooth over the problems, even his own coalition partners are getting worried. Cullen has already had to ditch a dedicated tax for his super-fund and lost the battle to get a firm commitment on how much the government has to add each year.

By the time the proposal gets to parliament, the Alliance, the Greens and NZ First will all have had their say, otherwise it simply will not get past National. With so many cooks, it is inevitable, say critics, that this will be a heavily watered-down broth.

While Dr Cullen is boldly turning his back on the recognised path being followed by other Western countries he might well not see his super baby grow to maturity.

A parliamentary term lasts just three years inNew Zealand and, with business confidence in the administration plummeting, Labour could be a one-term wonder, in which case, Cullen&#39s super idea for a super fund would be entirely superseded.

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